Adopting AI And Expanding Into Regional Markets Will Improve Future Operations

Key Takeaways

• Focus on AI and cloud technology transformation aims to enhance revenue through operational efficiencies and expanded product offerings.
  
• Effective cost management and new market expansion are poised to improve net margins and drive future revenue growth.
  
• Slowing growth, credit losses, and tech investments could strain margins, while upgrades and income variability pose challenges to revenue and profitability stability.

Catalysts

Provides various financial products and services in Australia, New Zealand, Ireland, the United Kingdom, and Canada.

• Humm Group's focus on technology transformation, including investments in AI and cloud initiatives, is expected to enhance revenue by improving operational efficiencies and expanding product offerings.
  
• The strategy to leverage AI and electronic tools in commercial financial processes aims to increase market share, potentially improving net margins through better resource allocation and faster transactions.
  
• The significant cost reductions, with a 13% decrease in operating expenses, suggest potential for improved net margins as Humm Group continues to manage costs effectively even in a challenging inflationary environment.
  
• Expansion into new markets and verticals, like regional New South Wales and Queensland and new agricultural policies, could drive future revenue growth by tapping into previously underutilized areas.
  
• The implementation of their hybrid product in consumer finance is expected to increase earnings by enhancing unit economics and adapting to regulatory changes, thereby boosting profitability in the long term.

Humm Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Humm Group's revenue will grow by 45.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 7.6% in 3 years time.
• Analysts expect earnings to reach A$57.2 million (and earnings per share of A$0.12) by about February 2028, up from A$1.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$75.2 million in earnings, and the most bearish expecting A$39.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2028 earnings, down from 166.9x today. This future PE is lower than the current PE for the AU Consumer Finance industry at 14.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.69%, as per the Simply Wall St company report.

Humm Group Future Earnings Per Share Growth

Risks

• The company is experiencing signs of slowing growth in the market, particularly with SMEs delaying large equipment purchases, which could lead to a reduction in revenue growth and impact net margins.
  
• There have been higher-than-expected losses in the Canadian business, partly due to credit issues with some merchants, which could negatively affect earnings and overall profitability.
  
• Continued investment in technology and transformation is required for future growth, which may strain existing capital expenditure budgets and impact net margins if not managed efficiently.
  
• The Australian Cards system is undergoing upgrades, and there is uncertainty about when the business will return to growth, potentially affecting revenue and earnings in the short term.
  
• The use of forward flow for managing yield implies potential variability in income generation, which could impact revenue stability and net operating income based on market conditions and strategic decisions.

Valuation

• The analysts have a consensus price target of A$0.827 for Humm Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.0, and the most bearish reporting a price target of just A$0.58.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$752.4 million, earnings will come to A$57.2 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of A$0.66, the analyst price target of A$0.83 is 20.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.